Ask the consultant: Pricing commoditized services
- July 26, 2009 - 7:12 PM
Q How does one price a service that has been commoditized, such as Web development? There appears to be a wide disparity in pricing, ranging from generic cookie-cutter sites from companies such as Yahoo to high-end custom development companies charging tens of thousands of dollars.
AJAY KUMAR MANDAL
A Web development is an example of a small market with an overcapacity of sellers. Consumers typically view the services of many Web developers as equivalent, with no point of differentiation but price. The current state of the customer is a sophisticated buyer that is price-sensitive, forcing the Web developers to lower their prices. The industry is suffering from what researchers call "price erosion," an expression for the lack of differentiation between the companies.
Web development managers should be very knowledgeable about the components of the service. Is the Web developer a pure service? A hybrid? What percentage of product is embedded in the service provided? Where are the customers coming from and what are their needs? What are the customers comparing your service with? Once the manager knows about the different components of the service, pricing becomes easier, because the manager is able to create solutions for every customer.
Keep in mind that it is definitely easier to customize a service than a product. The manager should decide which services are to be offered as standard and which services should be offered as options, pricing those options differently.
Managers have to know the cost of each service in order to bundle the services to the customer.
They can then reevaluate the standard service offering, remembering that "customer satisfaction" is not a viable measure. After all, a customer may be happy with the service, but it may not be what they originally wanted.
UNIVERSITY OF ST. THOMAS
OPUS COLLEGE OF BUSINESS
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